Directing Change through Governance

Directing Change through
Phil Kenkel
Bill Fitzwater Cooperative Chair
Oklahoma State University
Traditional View of the Board of
Basic competencies
 Duties
◦ Care
◦ Loyalty
◦ Obedience
Distinguishing board and manager
Evolving View of the Board
 Dodd-Frank
 Audit Committee
 Risk Oversight Committee
 The Strategic Board
Changing Cooperative Industry
 More complex
 More zeros on the financial statements
 Joint ventures, alliances
 Mergers, Acquisitions
 Succession Planning
 Infrastructure reinvestment
Board Alignment
“Organizational alignment occurs when
strategy, goals, tactics and cultural values are
mutually supportive, and when the systems
and people of an organization are linked and
compatible with each other.”
 The concept of alignment encompasses
basic competencies and best practices but
also provides a framework for continuous
Board Alignment
Internally aligned
 Aligned with the cooperative’s strategy
 Aligned with the CEO
 Aligned with member interests
Internal Alignment
Clear understanding of roles and
 Clear expectations for board members
 Efficient board procedures
Board Procedures
Frequency, format and length of board
 Prioritize informational needs
 Operational information and budgets that
can be compared with strategic goals
 Agenda and information packet
distributed with sufficient lead time
Group Dynamics
An effective board is comprised of peers
who respect and work well with each
 Boards are not natural teams
 Board chairperson plays a key role
◦ Promote constructive debate
◦ Build consensus
◦ Summarize and frame decisions
Barriers to Internal Alignment
Board Politics
Under Performing Directors
Board Politics
◦ Conflict between constituency groups
◦ Geographic board districts particularly
◦ Guarding interests of district instead of
communicating their unique perspective
◦ Aligned directors vote in the best interest of
the cooperative even if the final outcome is
not advantageous to their constituency
Under Performing Directors
The most sensitive issue of internal
Additional training
Ask and over-extended director to trim
other commitments
Board chair may have to ask the under
performing director to resign
In an aligned board directors are committed
to performing at full potential and have the
courage to address educational needs
Under Performing Directors
“Too many cooperatives rely on term limits to
remove the underperforming director. If a
board member has no interest in or no
potential for performing well in the board
role, it is time to encourage, and eventually
insist that they step down.”
Board Composition
Skill and dedication is the single most
important factor in board effectiveness
 Balance of experience, financial expertise
and diversity of perspectives
 Continuity is important but a degree of
turnover keeps a fresh perspective
Imagine a Soccer Team with 11
Recruiting and Retaining Directors
A member responsibility
 Board must develop culture and
procedures to ensure multiple quality
 Associate board can be vehicle to groom
perspective board members
 Comprehensive orientation that allows
directors to understand cooperative
operations and risk profile
Alignment with Cooperative
The unaligned board reverts to
 Strategic alignment allows the board to
prioritize issues
 Aligned board has clarity in regard to the
cooperative’s strategy
 Not just consensus, the directors own the
“A good test for strategic alignment is to poll
the board mid-year about the #1 priority for
the cooperative. If there are five different
answers, the board is not strategically
Strategic Alignment
Strategy is often proposed by the CEO
 Developed through interactive dialog with
the board
 Consider whether the cooperative has
the financial and human resources to
implement the strategy
 Don’t just formulate the plan, be a
strategic advisor to the CEO on a
continual basis
Strategic Alignment
 Equity retirement
 Risk management
 Management succession
Board Role in Risk Management
Informed oversight
 Debate and develop a shared vision for
risk appetite
 Consider financial reserves, borrowing
capacity, member equity at risk
 Ultimately it’s a philosophy
 Processes in place to control risks within
your capacity to absorb lose
Management Succession
Critical governance topic for most
 Insufficient time and effort is being
devoted to succession planning
 Top priority and should be addressed on
a continuing basis
 Aligned in vision for CEO and philosophy
toward developing internal talent or
Alignment with the CEO
First, second and third most challenging
issue for board alignment
 Ask the right questions, demand
information, thoroughly understand the
 Not preempt the CEO’s responsibility for
running the company
 Micro-managing versus abdicating
governance role
Challenges to the Board-CEO
Board has long run perspective
 CEO focuses on day to day issues
 Board devotes substantial but limited time
 CEO devotes continuous attention
 Board’s information comes from the CEO
 Board is a deliberating body
 CEO makes individual, short time frame
Alignment with the CEO
Communication and adjustment on both
 Board provides feedback on matters it
expects to be informed on
 CEO adjust decisions and information
 CEO provides information on current
business environment
 Board adjust their advice from long term
issued to short term strategies
Alignment with the Member’s Long
Term Interest
Most nebulous but most important aspect
of the aligned board
 Boards make inter-related decisions on
cash patronage, retaining funds,
infrastructure investment and equity
 These decisions create alignment
Alignment with Member Interest
Insufficient reserves and investment-not
protecting the long-term stability
 Excess unallocated reserves-reduces
member’s long term return
 Long equity revolving period-member
investment is not aligned with use
 Qualified stock was historically justified
but may no longer be in member’s
Aligning with Member Interest
Aligning the cooperative with member
interest involves aligning assets with the core
membership needs, maximizing profits
through efficient operation, managing the
balance sheet for liquidity, solvency and
adequate reserves and then distributing all
residual cash to member owner as cash
patronage and equity retirement.
Metrics and Tools
Monitor ROA and ROE
 Goals for solvency and liquidity
 “Goodman Formula Calculator”
determines profit level required for given
asset growth, cash patronage and
revolving cycle
 Enterprise Risk Management measures
risk exposure and capacity
 Tools to model cash flow and implications
of alternative equity management
The Cooperative Business Model
Has a Lot of Moving Parts
The board needs financial tools on their dashboard
Creating the Aligned Board
Continuous improvement
 Education
Comprehensive orientation
Risk management
CEO succession planning
Chemistry between Board and
Board chair person is gatekeeper for the
 CEO is gatekeeper for staff and opreration
 Chair is sounding board for the CEO for
emerging issues
 CEO provides insights into business
environment and policy and strategy issues
 Informal meetings allow both the chair and
CEO to reflect on issues before framing the
issue for board deliberation
Meeting Agendas
Chair and CEO work together to
establish agendas
 Sufficient time to discuss strategic issues
as well as monitoring
 Board are expected to devote more time
to internal controls, the audit and risk
 Most boards still only meet 10-12
Member Communication
Often overlooked responsibility of the board
Members must be informed about operating
environment and decisions
Informed members can provide feed back to
the board
Direct contact
Multiple communication channels
Younger producers will respond to blog,
Twitter feed or Facebook posting
Board Evaluation
Only a minority of boards systematically
evaluate the board’s performance
 Begin with overall board performance
 Can expand to have directors self
evaluate their performance
 In the aligned board directors have the
comfort level to give and accept
constructive feedback on personnel
“Good boards are made up of
accomplished leaders who value
continuous improvement. Those
directors work to find ways to make a
good board better!”
The Aligned Board
Directors are elected by the membership
to ensure that their long term interest
are served
 Requires highly accomplished individuals
and a high performing team
 Board members must draw from their
knowledge and skill to professionally
manage the board
 Board alignment is a framework for
continuous improvement

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